Private credit's growth over the past decade was enabled in part by regulatory constraints on banks. Post-crisis capital rules made certain types of lending uneconomic for regulated institutions. Leveraged lending guidance explicitly capped bank exposure to buyout financing. Banks retrenched; private credit filled the vacuum.
That regulatory backdrop may be shifting. The OCC recently rescinded its longstanding leveraged lending guidance, removing the caps that constrained bank lending into private equity buyout deals. This is among the most significant regulatory developments for private credit competitive dynamics in years.
What Changed
The interagency leveraged lending guidance, issued in 2013, established supervisory expectations for banks engaged in leveraged lending. Among other provisions, it effectively capped leverage multiples for bank-funded buyout loans and required banks to demonstrate borrower capacity to repay.
The guidance created a structural advantage for private credit. When private equity sponsors needed financing at leverage levels that made banks uncomfortable—or that triggered supervisory scrutiny—they turned to direct lenders. Private credit became the financing source of choice for deals that banks couldn't or wouldn't do.
With the guidance rescinded, banks can re-enter leveraged lending more aggressively. The structural advantage that private credit enjoyed is no longer guaranteed.
The Competitive Questions
Several questions emerge from this regulatory shift.
How does private credit compete against banks with lower cost of capital? Banks fund themselves with deposits and can often price loans more cheaply than private credit funds that must deliver target returns to investors. If banks and direct lenders are competing for the same deals with similar terms, banks may win on price.
What happens to non-price competition? Private credit's value proposition has never been solely about price. Speed, certainty, flexibility, and willingness to provide larger hold sizes have differentiated direct lenders from syndicated bank markets. These advantages persist regardless of regulatory changes.
Will terms adjust? If bank competition intensifies, direct lenders may need to compete on dimensions beyond pricing: easier covenants, longer maturities, larger delayed draw facilities, more flexible terms. Whether this represents healthy competition or a race to the bottom depends on execution.
What if debt quantum assumptions change? The analysis changes if banks can provide larger total debt packages than direct lenders. If bank re-entry means not just competitive pricing but also competitive sizing, private credit's addressable market could shrink.
Scenarios to Consider
Scenario one: Banks re-enter selectively, focusing on larger, higher-quality credits where their cost-of-capital advantage matters most. Private credit retains the middle market and more complex situations where bank appetite remains limited.
Scenario two: Banks compete aggressively across the spectrum, driving spread compression and forcing private credit managers to accept lower returns or move into riskier credits.
Scenario three: Regulatory change proves more symbolic than substantive. Banks may have the regulatory freedom to lend but lack the appetite, infrastructure, or risk tolerance to meaningfully re-enter. The competitive landscape changes less than headlines suggest.
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The most likely outcome may be a combination of all three scenarios, varying by market segment. Large-cap deals may see more bank competition while the core middle market remains primarily a direct lending domain.
The Bottom Line
Private credit's market share gains over the past decade were enabled in part by regulatory asymmetry. That asymmetry is eroding. Managers who assumed structural protection from bank competition need to reconsider their competitive positioning. The winners will be those who offer genuine value beyond regulatory arbitrage: better execution, faster certainty, more flexible structuring, or superior workout capabilities. The regulatory tailwind may be shifting to a headwind—or at least to a more level playing field.